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Hog Talk: Cutout Cuts · Professional Ag Marketing Podcast

• 0:01
  SPEAKER_01: Welcome to the Hog Market Talk Podcast with professional egg marketing.
• 0:05
  SPEAKER_01: Come here to get fresh updates on what's happening week to week within the Lean Hog complex.
• 0:10
  SPEAKER_01: Trading commodity futures and options involves substantial risk of loss and is not suitable for all investors.
• 0:16
  SPEAKER_01: And remember to visit swineweb.com, an excellent resource for information in the pork industry, where you can also find this podcast.
• 0:25
  SPEAKER_01: This is your host, Mike Minor.
• 0:26
  SPEAKER_01: Let's cross.
• 0:27
  SPEAKER_01: Today is September 17th.
• 0:29
  SPEAKER_01: I've got Luke Wells with us here today.
• 0:30
  SPEAKER_01: How's it going, Luke?
• 0:31
  SPEAKER_00: It's going good, Mike.
• 0:32
  SPEAKER_00: How are you doing today, man?
• 0:33
  SPEAKER_01: We're doing really good.
• 0:34
  SPEAKER_01: Well, let's start off with a little bit of the news from the Federal Reserve here this morning.
• 0:39
  SPEAKER_01: Then we're going to talk about the uh cutout a little bit here, and then the rest of the hog complex as well.
• 0:45
  SPEAKER_01: That sound good?
• 0:46
  SPEAKER_01: Sounds perfect.
• 0:47
  SPEAKER_01: Alright, well, the Federal Reserve officials, they lowered their benchmark interest rate by a quarter percentage point today.
• 0:53
  SPEAKER_01: They penciled in for two more reductions this year, Luke.
• 0:56
  SPEAKER_01: So uh given the news from them, the 25 basis point cut was as expected.
• 1:03
  SPEAKER_01: Market was expecting like a 90% chance that was gonna happen.
• 1:06
  SPEAKER_01: The other ten thought it would have been a little bit more.
• 1:09
  SPEAKER_01: They did have one person on an 11 to 1 uh vote that uh the one person wanted a half a point.
• 1:17
  SPEAKER_01: So that descent uh getting a little bit more common, but that is definitely not inside of the norm.
• 1:23
  SPEAKER_01: They're normally all unison together.
• 1:26
  SPEAKER_01: So uh that's uh getting a little bit more uh growing tensions in that room at least.
• 1:31
  SPEAKER_01: But uh that was big ish news I'd say for the for the outside markets this week.
• 1:37
  SPEAKER_01: Powell pointed to growing signs of weakness in the labor market.
• 1:41
  SPEAKER_01: Uh that's something they've focused on heavily, and uh they decided that's why they thought it was time to start cutting rates and could see two more going forward.
• 1:50
  SPEAKER_01: So the labor market in whole is uh the labor demand has softened and uh the recent pace of job creation just appears to be running a little bit below the break-even rate needed to hold the unemployment rate consistent, they thought.
• 2:04
  SPEAKER_01: So uh he said they can no longer call the the labor market very solid, was his opinion.
• 2:11
  SPEAKER_01: So uh inflation's not as low as they want it to be.
• 2:14
  SPEAKER_01: Labor markets a little weak.
• 2:16
  SPEAKER_01: So they just did what they would call like a risk management cut.
• 2:19
  SPEAKER_01: They probably will do a couple more of those the rest of the year.
• 2:22
  SPEAKER_01: Does this change anything?
• 2:24
  SPEAKER_01: It sure didn't seem to.
• 2:25
  SPEAKER_01: The SP 500 was pretty much unchanged after they came out with that news today, which they were expecting.
• 2:30
  SPEAKER_01: I'd say the two more cuts the rest of the year is uh hopeful, maybe a little bit still from them, but um yeah, that'd be good news, right?
• 2:38
  SPEAKER_01: For sure.
• 2:38
  SPEAKER_01: So that's kind of what we had out of them today.
• 2:41
  SPEAKER_01: Uh otherwise the SP 500s ran up to record levels and then some.
• 2:45
  SPEAKER_01: Uh the US dollars probably taking this news the hardest.
• 2:49
  SPEAKER_01: It took a hard drop today, the last two days prior, it would took a hard drop.
• 2:53
  SPEAKER_01: So, like uh yesterday, Luke, uh the grain markets like corn, soybeans, those were quite a bit higher.
• 2:58
  SPEAKER_01: That played a part in that as well.
• 3:00
  SPEAKER_01: Along with we've had news now, China and President Xi for China are gonna meet at the end of this week and talk over a meeting uh about a uh a trade deal.
• 3:10
  SPEAKER_01: And it sounds like from the reports are they think they're getting closer.
• 3:15
  SPEAKER_01: Um they thought something would come in the near term, which explain near term, is that this president or the next one?
• 3:20
  SPEAKER_01: Who who knows on all that, right?
• 3:21
  SPEAKER_01: But uh nonetheless, that fired up some of the grain markets this week.
• 3:25
  SPEAKER_01: Uh, even the hog market, they said it maybe had a little bit of an impact on, but uh other than that, that's kind of what I focused on this week there, Lucas.
• 3:34
  SPEAKER_01: Awesome.
• 3:34
  SPEAKER_01: What do you think about cutout here?
• 3:36
  SPEAKER_01: I want to dive right into the hogs.
• 3:38
  SPEAKER_01: You uh in the last 24 hours, you saw uh us pull back and cutout from like 114 to 112.
• 3:44
  SPEAKER_01: Now we're down to a 110 type number.
• 3:47
  SPEAKER_01: What do you think about this weakness here in the last couple days on this cutout market?
• 3:51
  SPEAKER_00: Yeah, I think it's very, very logical and and and very you know, very, very, very much seasonal, Mike, right?
• 3:57
  SPEAKER_00: So we I mean if you look at cutout at these current levels, I mean they're it it it it's amazing.
• 4:02
  SPEAKER_00: I mean, we're like almost record high, if not record high.
• 4:05
  SPEAKER_00: And and you know, the last you know, the the these last two weeks, this week and last week, and then I'm gonna take it back to Hog Slaughter.
• 4:12
  SPEAKER_00: I mean, we had been running like three, four percent less than a year ago kills.
• 4:16
  SPEAKER_00: In our opinion, we felt that that was underkilling available supply that was also uh very much supported by producer Hogwaits, jumping up to like some of the highest records ever, right?
• 4:27
  SPEAKER_00: And so, you know, we you know, we my point is that you know, that 115 type cutout we were experiencing.
• 4:34
  SPEAKER_00: Yes, the overall protein complex is in a very good spot, even though beef choice is taking a little bit of a another four and a half off choice today for five semester.
• 4:45
  SPEAKER_00: But it's still what 380, 390, 388, yeah, right, right up there.
• 4:50
  SPEAKER_00: It's pulling back.
• 4:50
  SPEAKER_00: Way high, but but supportive.
• 4:52
  SPEAKER_00: I mean, protein all proteins are in good spots, right?
• 4:55
  SPEAKER_00: But I would I would argue us underkilling supply helped elevate that cutout a little higher and a little longer than than normal.
• 5:03
  SPEAKER_00: And you know, we needed this this big kill.
• 5:06
  SPEAKER_00: So last week, you know, was the first kind of you know bigger, you know, September kill of the year.
• 5:11
  SPEAKER_00: Um, we killed just a little bit over 251 last week.
• 5:15
  SPEAKER_00: I see the number uh two five two one.
• 5:18
  SPEAKER_00: This week we're estimating like a 259.
• 5:21
  SPEAKER_00: And my whole point with that is is um you know that's going up from like you know, two, three, two, four type numbers.
• 5:26
  SPEAKER_00: We we we we needed to clean up the hogs.
• 5:29
  SPEAKER_00: Uh right right now, I mean the pork industry, packers are making money, producers are making money.
• 5:34
  SPEAKER_00: We have we've been underkilling supply.
• 5:36
  SPEAKER_00: We needed a big kill this week.
• 5:38
  SPEAKER_00: We're gonna get it.
• 5:40
  SPEAKER_00: Cash market this week, you know, hogs trading in the 106s, 108s, I mean, that type area.
• 5:45
  SPEAKER_00: Um, you know, it just it just we needed to clean this up.
• 5:48
  SPEAKER_00: But you look at that, and it's very logical when we've got to move these extra pounds.
• 5:52
  SPEAKER_00: It's I mean, cutout, it just supply and price matters, right?
• 5:56
  SPEAKER_00: I mean, so this this cutout drop, I mean, the board's seen it because it's been discounted.
• 6:01
  SPEAKER_00: Basis has been better than normal, right?
• 6:03
  SPEAKER_00: It's just how quick and how fast does it come?
• 6:05
  SPEAKER_00: But you know, when we saw this week's kill, I mean, almost a 2-6.
• 6:09
  SPEAKER_00: You know, it's it's just very logical to think cutout's gonna drop with that just a little bit from a very, very high level.
• 6:14
  SPEAKER_00: So, I mean, I'd say this this drop is is not a surprise to traders.
• 6:19
  SPEAKER_00: I'd say it's very logical, and you know, and just take a little bit of a step back in perspective.
• 6:24
  SPEAKER_00: You know, yes, we it's pulled features back a little.
• 6:26
  SPEAKER_00: You know, we're off contract highs that we like hit every day for what a week or will, if you will, right?
• 6:31
  SPEAKER_00: But still great forward margins.
• 6:33
  SPEAKER_00: You know, we're in a you know in a really good spot.
• 6:36
  SPEAKER_00: Uh the forward curve, it's it's just it's kind of unprecedented type uh type opportunities out there.
• 6:42
  SPEAKER_00: So so anyway, I mean I just this little cutout drop, it's there's no structural change in demand.
• 6:47
  SPEAKER_00: There's no ban, we lost a bunch of export markets.
• 6:50
  SPEAKER_00: It's we're getting into the time of year, you know, when we have you know two five type kills and two this, I mean this two six type kill this week.
• 6:57
  SPEAKER_00: This would be the first time this that'd be bigger than a year ago kill.
• 7:00
  SPEAKER_00: Last year, I'll get the data right here.
• 7:02
  SPEAKER_00: We killed two five one seven, you know, so it'd be at a two five nine.
• 7:05
  SPEAKER_00: This would be one of the first weeks in like a long time we've killed more pigs than a year ago.
• 7:09
  SPEAKER_00: And uh again, we we think it's just a function of we were we were underkilling some supply, you know, here as we kind of got into the tail end of August and the early part of September.
• 7:17
  SPEAKER_00: So all in all, things are in a good spot, still some great hedging opportunities, still phenomenal spot fundamentals.
• 7:24
  SPEAKER_00: Uh for what it's worth, Mike.
• 7:26
  SPEAKER_00: Um, you know, we do have a hog and pig report coming out, I believe it's next Thursday, 2020.
• 7:30
  SPEAKER_00: Cattle on Feed Friday.
• 7:31
  SPEAKER_00: Yeah, Cattle on Feed Friday.
• 7:33
  SPEAKER_00: So we'll get you know an updated view of what the USDA shows us for current inventories, right?
• 7:38
  SPEAKER_00: But uh, it's just I mean, the whole proteins and the you know, the the hog space, really, really uh really awesome opportunities.
• 7:46
  SPEAKER_00: It's fun to be in an industry that's you know that's working like this.
• 7:49
  SPEAKER_00: So yeah, you got a little bit of drop in the cutout, but you know, let's not lose sight of the kind of what do you say, the forest through the tree, right?
• 7:55
  SPEAKER_00: Still things are in a in a really good spot.
• 7:58
  SPEAKER_00: And and again, you know, just dropping from like record levels as we up some production, it's it's just it's pretty logical, Mike.
• 8:04
  SPEAKER_01: We haven't been near the 20-day moving average on like December hog futures, for example, since the end of August.
• 8:10
  SPEAKER_01: So we're approaching that level, 65 cents away today from that.
• 8:14
  SPEAKER_01: I'm I'm looking to see here tomorrow if there's a little bit follow through, some weakness.
• 8:19
  SPEAKER_01: I'm curious to see if we'll find support around that area or not here.
• 8:22
  SPEAKER_01: So that's something I'm gonna be watching from a technical perspective.
• 8:26
  SPEAKER_00: Yeah, yeah.
• 8:26
  SPEAKER_00: You know, it it's been it's been interesting.
• 8:28
  SPEAKER_00: I mean, when we you know, we pushed up right near contract ties on the DS, we hit that on the 12th of here this September, you know, hit a high of 89.57.
• 8:37
  SPEAKER_00: And again high levels historically.
• 8:40
  SPEAKER_00: It is, and you know, just think that through.
• 8:42
  SPEAKER_00: I mean, if we want to have that be right about a ninety dollar de sex ration, we we probably need at least a ninety-eight, maybe uh maybe a hundred dollars in the middle of winter.
• 8:51
  SPEAKER_00: And you go back over time.
• 8:52
  SPEAKER_00: I mean, that's it's just what I've been saying to people is I mean, it's hard to get better than really good.
• 8:58
  SPEAKER_00: No, they may can't be great plus, right?
• 9:01
  SPEAKER_00: Yeah and we have the right dynamic, but we we had a lot of optimism this thing.
• 9:05
  SPEAKER_00: We also, you know, we we added we were we're getting a little bit of technical selling, some profit taking.
• 9:09
  SPEAKER_00: Yeah, we pushed commitment of traders up last week, not quite to record long, but within a few thousand contracts.
• 9:15
  SPEAKER_01: I mean and beef, I mean, we're down another five bucks on feeder cattle today, fat cattle were down two and a half dollars.
• 9:21
  SPEAKER_01: So I would assume, especially at the end of the day, we had to have some spillover from the cattle of the hawk.
• 9:26
  SPEAKER_00: Yeah, for sure, for sure, for sure.
• 9:28
  SPEAKER_00: So it's it's no, I just think you know, keep keep keep watching things.
• 9:31
  SPEAKER_00: We you know, we've got reasonable costs, you know.
• 9:35
  SPEAKER_00: Uh I mean they it looks like the corn crops, you know, not new news, right?
• 9:38
  SPEAKER_00: But a little smaller from what it once was, right?
• 9:40
  SPEAKER_00: As we just had some production issues, but very competitive cost of gains, great revenues, Vernon Fundamentals, even though they're a little weakish this week, still phenomenal levels.
• 9:50
  SPEAKER_00: It's all kind of where you start from, right?
• 9:52
  SPEAKER_00: So again, just uh I think this is just kind of you know, the old saying, and when the kids go back to school, you know, the hog production goes up, and that's happening again.
• 10:01
  SPEAKER_00: And you know, we uh well price matters, right?
• 10:04
  SPEAKER_00: And we just need a little lower price to continue to move this product and what still is a phenomenal, phenomenal demand situation for us, Mike.
• 10:12
  SPEAKER_01: All right, thank you for your time, Luke.
• 10:13
  SPEAKER_00: Have a good day, bud.
• 10:14
  SPEAKER_01: And thank you to all our listeners.
• 10:16
  SPEAKER_01: Please reach out to us at professionaleggmarketing.com.
• 10:20
  SPEAKER_01: Check out our other podcast as well, Professional Egg Marketing, that's released every Friday.
• 10:25
  SPEAKER_01: Trading commodity futures and options involves substantial risk of loss and is not suitable for all investors.
• 10:31
  SPEAKER_01: See you next time.